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Credit union preferred shares
January 13, 2021
7:22 am
canadian.100
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Edit by admin: this thread was spun off from a discussion about PACE Securities

savemoresaveoften said

Thats my understanding too. CUs just call it preferred shares but the payout is not qualified as "eligible dividend", which gets you the dividend tax credit.

As for a "preferred shares" that has variable payout, one should be quite clear it definitely is NOT a regular preferred share or GIC.  

Would be interesting to know how credit unions are able to call these "preferred shares". Usually preferred shares rank ahead of common shares? Is that the case with credit unions? Also, Interesting that the payout is not considered a dividend. These CU type "preferred shares" seem to be a real misnomer. If one REALLY wants preferred shares, one should stick with issuers like the big banks (Royal etc), insurance companies (Sun Life etc.) and others such as Enbridge, TransCanada, Pembina and so on.

January 13, 2021
7:30 am
Norman1
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Credit union preferred shares are actual preferred shares of a corporation and the preferred shares do rank ahead of the credit union's common shares.

However, credit unions don't pay regular corporate income taxes. So, they don't have any balance in their general rate income pool (GRIP) that they can pay an eligible dividend out of. More details in this previous post.

January 13, 2021
11:26 am
Bill
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This reminded me to call a local credit union where I have some of these things that I thought matured about now. I was told they actually don't "mature", it's just the 4% minimum payout guarantee of the last 5 years has ended and now it's 3.5% for the next year. So I said ok, I won't sell them back to you (that's the option she gave me), I'll just keep them for another year and then revisit. I asked if I could buy more, she said there's a waiting list, I said that's funny, I've had zero correspondence from you re this, she said "I'm surprised". But that's credit unions for you - sneaky.

January 13, 2021
5:27 pm
COIN
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Bill said
I was told they actually don't "mature",.  

That's why they are not suitable for RRSP's (because they never mature).

January 14, 2021
3:29 pm
Bill
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Exactly, got confirmation today they go on forever, unless I want to sell them back to the credit union, which I can do anytime but it takes about a month or so to get your money. And the annual March dividend (interest for tax purposes) is paid to holders of record the previous Dec 31. If you do turn them in you get the pro-rated dividend to the end of the previous month, so if you turn them in in July you will get the dividend portion calculated to the end of June, though it's not clear when.

And the 3.5% rate they told me for 2021, well apparently the board doesn't meet to confirm that until March or so but it "looks like" that will be the rate, that's why I had no notice of it. So it's not confirmed what dividend/interest I've been getting since Jan 1. And my "coach" had to go off for a few hours to get these answers to my questions, even she wasn't sure how it all worked until I asked. Maybe I should have read the multi-page fine print prospectus or whatever it was 5 years, I was just going on their representation that I was buying a 5-year vehicle when in fact I wasn't. Luckily it's no big deal to me, I'm just leaving it there, as long as they don't go broke I'll be fine. Ah, credit unions, (back to this thread's topic) be careful what you're signing.

January 14, 2021
3:49 pm
canadian.100
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Bill said
Exactly, got confirmation today they go on forever, unless I want to sell them back to the credit union, which I can do anytime but it takes about a month or so to get your money. And the annual March dividend (interest for tax purposes) is paid to holders of record the previous Dec 31. If you do turn them in you get the pro-rated dividend to the end of the previous month, so if you turn them in in July you will get the dividend portion calculated to the end of June, though it's not clear when.

And the 3.5% rate they told me for 2021, well apparently the board doesn't meet to confirm that until March or so but it "looks like" that will be the rate, that's why I had no notice of it. So it's not confirmed what dividend/interest I've been getting since Jan 1. And my "coach" had to go off for a few hours to get these answers to my questions, even she wasn't sure how it all worked until I asked. Maybe I should have read the multi-page fine print prospectus or whatever it was 5 years, I was just going on their representation that I was buying a 5-year vehicle when in fact I wasn't. Luckily it's no big deal to me, I'm just leaving it there, as long as they don't go broke I'll be fine. Ah, credit unions, (back to this thread's topic) be careful what you're signing.  

So they offered to "buy back" the shares if you wanted. Would you get your full cost back if you decide to cash in? or less than your "original investment."
Is this one of the major CUs?

January 14, 2021
3:57 pm
Bill
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I think that's just the deal for anybody, if you want to get your money back they buy them back for what you paid. Actually I've been compounding the interest, haven't received any of it, so every year they "rollover" at an amount including the interest. Not a major CU, operates in SW Ontario.

January 14, 2021
5:35 pm
Norman1
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Are you sure the credit union was going to buy back the shares?

With a waiting list of buyers, the credit union may just be matching you up with some of the buyers on the list.

We looked at some 4.25% shares from DUCA. If there were not enough buyers lining up, that credit union would not buy back/redeem more than 10% of what was outstanding at the start of each year.

January 14, 2021
7:36 pm
Bill
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That's what she told me, if I ever want to cash them in they take them back. I don't really care if they're buying them or another buyer is, makes no difference to me. It makes sense they might cap redemptions though, like DUCA, they probably couldn't pay out if everybody wanted their money back. Maybe that's why they're offering a crazy 3.5% this year, they want no redemptions they can't easily re-flog.

Of course I kept the book they gave me at the time with all the fine print until about a week ago when I put it out for the blue box because I thought they were maturing now and I wouldn't need it! And I can't find anything about these shares online. If I decide to keep them I'm going to tell them I need another copy.

My investment is only about $25K so not a big deal, but seems there's often a lack of clarity with these credit unions.

January 15, 2021
5:27 am
savemoresaveoften
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Bill said
That's what she told me, if I ever want to cash them in they take them back. I don't really care if they're buying them or another buyer is, makes no difference to me. It makes sense they might cap redemptions though, like DUCA, they probably couldn't pay out if everybody wanted their money back. Maybe that's why they're offering a crazy 3.5% this year, they want no redemptions they can't easily re-flog.

Of course I kept the book they gave me at the time with all the fine print until about a week ago when I put it out for the blue box because I thought they were maturing now and I wouldn't need it! And I can't find anything about these shares online. If I decide to keep them I'm going to tell them I need another copy.

My investment is only about $25K so not a big deal, but seems there's often a lack of clarity with these credit unions.  

With Pace, I was told they will "try" to match up buyer with seller when I decide to sell. Also something about a 5y holding period something like that (bot in Aug, 2018). Will contact them re how I can cash out and close account once my only GIC matures next month.
With I bought the GIC, the guy kept asking me to buy some of the "investment shares" which were 4% at the time. So I threw him a bone and put $2k in it 🙂

January 15, 2021
5:59 am
Bill
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I just did find, in some financial statements, same thing about only redeeming up to 10% of the total outstanding per year. So "coach" told me I could cash them in, but I suppose only if they haven't had 10% redeemed yet that year (another thing she didn't mention, though to be fair I don't think she knows much about these details). And, yes, they weren't redeemable for the first 5 years, the period of the 4% minimum rate guarantee.

They're Class I, Series 5 Prosperity Investment Shares at Libro credit union, fairly typical of what credit unions issue from what I've learned here. Seems like they just issue new series whenever they need more dough.

January 15, 2021
6:33 am
savemoresaveoften
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Bill said
I just did find, in some financial statements, same thing about only redeeming up to 10% of the total outstanding per year. So "coach" told me I could cash them in, but I suppose only if they haven't had 10% redeemed yet that year (another thing she didn't mention, though to be fair I don't think she knows much about these details). And, yes, they weren't redeemable for the first 5 years, the period of the 4% minimum rate guarantee.

They're Class I, Series 5 Prosperity Investment Shares at Libro credit union, fairly typical of what credit unions issue from what I've learned here. Seems like they just issue new series whenever they need more dough.  

sounds like I will have some dead money sitting at Pace and wait for the 5y mark. Lets hope the Pace name still alive by then.....

January 15, 2021
11:00 am
Norman1
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Bill said
I just did find, in some financial statements, same thing about only redeeming up to 10% of the total outstanding per year. So "coach" told me I could cash them in, but I suppose only if they haven't had 10% redeemed yet that year (another thing she didn't mention, though to be fair I don't think she knows much about these details). And, yes, they weren't redeemable for the first 5 years, the period of the 4% minimum rate guarantee.

The preferred shares likely won't count as regulatory capital if the holders could retract them, on demand, in five years. Such a retraction right would make the preferred shares look more like five-year debt than capital.

According to OSFI: Capital Adequacy Requirements (CAR) Chapter 2 – Definition of Capital, for banks, any instruments that count as Tier 1 capital cannot have a maturity or retraction date.

Some Tier 2 capital can. But, within five years of maturity, such Tier 2 instruments are prorated. Between 3 years and less than 4 years to maturity, for example, they only count as 60%.

January 15, 2021
1:02 pm
Bill
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To me a retraction right would apply only to an issuer, not a holder, i.e. retract what one has previously issued. But I don't know. The terminology they used when I asked about getting my money out, about redeeming my shares, was "selling them back" to them. The month's delay to get my funds would be to give the "board" time to consider and approve my request at the monthly meeting, I was told.

January 15, 2021
8:10 pm
Norman1
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Other way around. sf-laugh

A redeemable preferred share allows the issuer to force the holder to sell it back.

A retractable preferred share allows the holder to force the issuer to buy it back.

January 16, 2021
8:03 am
Bill
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Got it, retractable it is, thanks Norman1.

January 16, 2021
12:10 pm
Norman1
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It is also odd, Bill, that Libro Credit Union is redeeming the preferred shares at the same time they have a waiting list of members to buy them!

She could have been mistaken. The board would have met to approve a share transfer to another member instead of to approve a share redemption.

On the other hand, the credit union could be "suffering" from having too much capital, like the big banks are right now, and wishes to buy back shares in spite of the waiting list of buyers.

January 16, 2021
1:54 pm
Bill
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They're not redeeming them, if I hadn't contacted them they would have just assumed I wanted to keep them and collect the 3.5% dividend in 2021. It was me who incorrectly assumed they were going to mature soon, she clarified they're shares that don't mature at all. When I asked then how do I ever get my money she said I could any time sell them back to Libro if I didn't want to be a preferred shareholder any more.

I'm not clear about what the waiting list is for. When she told me they were paying 3.5% this year I said well in that case maybe I'll want to buy more then, on top of what I've already got, and she told me there's a waiting list for that (whatever "that" is). I didn't pursue it.

In any event, she gave me no indication they were encouraging me to sell my shares back to them.

I'm thinking now, due to the present lack of clarity plus the fact they were sold to me years ago without them making sure I had a clear understanding of what I was buying (admittedly, at least partly my fault), maybe I'll just sell them back to them. Then, aside from a few small GICs with a couple of Manitoba credit unions, I could done with credit unions and the confusion that seems often to be attached to some of their products.

January 16, 2021
10:21 pm
Norman1
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I would try to get a replacement copy of the fine print for the Libro preferred shares and see if they are still attractive at the 3½% yield they are anticipated to pay.

The staff may not have a clear understanding of the preferred shares either! sf-laugh

Credit unions are not IIROC regulated investment dealers. Consequently, the credit union customer staff are not registered dealing reps and are likely not trained to interpret the fine print on the shares.

January 17, 2021
5:33 am
savemoresaveoften
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Bill said
They're not redeeming them, if I hadn't contacted them they would have just assumed I wanted to keep them and collect the 3.5% dividend in 2021. It was me who incorrectly assumed they were going to mature soon, she clarified they're shares that don't mature at all. When I asked then how do I ever get my money she said I could any time sell them back to Libro if I didn't want to be a preferred shareholder any more.

I'm not clear about what the waiting list is for. When she told me they were paying 3.5% this year I said well in that case maybe I'll want to buy more then, on top of what I've already got, and she told me there's a waiting list for that (whatever "that" is). I didn't pursue it.

In any event, she gave me no indication they were encouraging me to sell my shares back to them.

I'm thinking now, due to the present lack of clarity plus the fact they were sold to me years ago without them making sure I had a clear understanding of what I was buying (admittedly, at least partly my fault), maybe I'll just sell them back to them. Then, aside from a few small GICs with a couple of Manitoba credit unions, I could done with credit unions and the confusion that seems often to be attached to some of their products.  

CU will continue to pay higher interest rate compared to other FIs, so no need to ditch them completely in my mind. Just be mindful and do not assume someone works at a branch knows more than you. In other words, they may use loose terms like GIC, preferred shares to describe a particular product, but the product may not be exactly as what you think it is. That applies to all FI staff, not just CUs !

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